Just a few minutes ago, Alan, I caught your talk in Washington on the record
oil prices that are discouraging the financial markets. There is plenty of
wisdom in your comments, as I especially agree with your debunking the idea
that the world is running out of oil. We have discussed this issue several
times over the last 30 years, from the time I was writing the energy
editorials for the Wall Street Journal in the 1970s. You know that the
fourfold jump in the price of a barrel of oil in 1973, from $2.50 to $10 a
barrel, was not because the world was running out of oil, but because
President Nixon had "floated the dollar" in August 1971. In other
words, the dollar price of gold had floated up fourfold, to $140 from $35, and
the Arab oil producers simply followed suit in order to maintain the real
price of their oil.

Where I take issue with you is where you blame the high dollar price of oil
today on factors other than the monetary policy of the U.S. You say, for
example:

These heightened worries about the
reliability of supply have led to a pronounced increase in the demand to
hold larger precautionary inventories of oil. In addition to the ongoing
endeavors of the oil industry to build inventories, demand from investors
who have accumulated large net long positions in distant oil futures and
options is expanding once again. Such speculative positions are claims
against future oil holdings of oil firms. Currently, strained capacity has
limited the ability of oil producers to quickly satisfy this markedly
increased demand for inventory.

Adding to the difficulties is the rising consumption of oil, especially in
China and India, both of which are expanding economically in ways that are
relatively energy intensive. Even the recent notable pickup in OPEC output,
by exhausting most of its remaining excess capacity, has only modestly
satisfied overall demand. Output from producers outside OPEC has also
increased materially, but investment in new producing wells has lagged,
limiting growth of production in the near term.

The fact is, Alan, that these are all
minor factors relative to the wide fluctuations in the dollar price of gold
over the last dozen years -- swings which of course could not have occurred
had the U.S. still been on the Bretton Woods gold standard. Remember I tried
to warn you in early 1997 that unless you persuaded your Fed colleagues to
switch from targeting the economy to targeting the gold price, that gold's
decline would soon lead to a decline in the price of oil and all other
commodities? As I made that argument to you repeatedly, even face-to-face, you
surely remember.

In retrospect, you might admit that I knew what I was talking about. Oil fell
from $25 bbl to below $10 in January 1999 and all other commodity prices
collapsed as well. And it all happened because you decided "the gold
signal" that you had been following all your adult life was no longer an
indication of anything important. The press corps and political establishment
feted you as "the maestro" because you had brought inflation down to
almost nothing, but in the process the world energy industry shut down. It
could not invest in infrastructure with costs of $15 a barrel when it could
only sell oil for $10 bbl. I can't blame you completely, Alan, because
everyone and his brother disagreed with me and agree with you. Still, you
should have learned from the experience. Here you said today:

Although OPEC production quotas have
been a significant factor in price determination for a third of a century,
the story since 1973 has been as much about the power of markets as it has
been about power over markets. The signals provided by market prices have
eventually resolved even the most seemingly insurmountable difficulties of
inadequate domestic supply in the United States. The gap projected between
supply and demand in the immediate post-1973 period was feared by many to be
so large that rationing would be the only practical solution.

Ah, the power of markets! Eventually,
you note, markets have adjusted to supply and demand conditions in the world
energy market. How nice that markets still work that way, but I'm afraid that
"eventually" is not good enough, which is why we and the rest of
mankind are burdened with $50+ oil when the price should be closer to $28 bbl.

For goodness sakes, Alan, you were a gold guy for almost your entire life,
appreciating that its signal was instantaneous, not "eventual." Big
difference, no? People make mistakes. President Bush made a biggie when he
warred against Iraq and he may not be re-elected because of it. You made a
biggie when you disavowed the gold signal. You don't have to bare your breast
in public and ask forgiveness, or anything like that. Just make an adjustment
in your public posture and bring the gold signal back into business. Every day
you do not causes some unnecessary misery to someone in the world as you are
one of the two or three most powerful men on the planet.